Analysis: Perceptions of high costs retard Islamic bond issuance

Islamic finance has been one of the fastest-growing sectors in global finance but it has yet to shake off perceptions about high costs and complexity that are holding back some issuers.

Sukuk, or Islamic bonds that follow religious principles such as a ban on interest and speculation, are a major funding tool for companies in the Middle East and south-east Asia, and are becoming more attractive to sovereign issuers.

Britain, Luxembourg, Hong Kong and South Africa are all keen to make maiden sukuk issues, to diversify their funding sources and tap liquidity from wealthy Islamic investors.

Those plans are not new: the UK government has been considering an Islamic bond since 2007, while Luxembourg first mooted a sukuk issue in 2010, and South Africa in 2011.

These and other plans have been delayed by factors including double taxation on some sukuk structures and a difficulty in identifying assets to underpin the transactions, although Islamic finance experts say such drawbacks have largely been overcome.

Hong Kong and Luxembourg have enacted legislation in the past few years to remove double or even triple tax duties that sukuk can attract due to the multiple title transfers required. Rising demand for sukuk has also depressed costs.

As a result, first-time issuers that would have expected to pay a premium on their sukuk in previous years could now achieve levels comparable to conventional bonds, he said.

“Issuers that have existing conventional bonds will have a benchmark curve to refer to and the sukuk should be priced flat, if not lower, than this reference. They should not pay a premium when raising sukuk.”

Issuance of sukuk hit a high of $134.3 billion (R1.4 trillion) in 2012, but fell to $114.3bn last year as jitters about US monetary policy constrained emerging market assets.

Growth of the market is expected to pick up again this year as the pool of Islamic funds in the Persian Gulf and south-east Asia continues to expand. A Thomson Reuters study predicts sukuk issuance of as much as $130bn this year.

Increased clarity on sukuk structures has helped. The design and approval process has become generic as more sharia advisory firms have entered the market, pushing down costs, according to Noel Lourdes, the executive director at Malaysian consultancy Amanie Advisors.

“It is a lot cheaper now. For corporates, it is broadly in line with eurobond or private dollar-denominated placement transactions.”

Still, Britain has downsized its plans for a sukuk issue to £200 million (R3.5bn), partly to pass the UK Treasury’s value-for-money test. And there is still a perception that sukuk are more expensive or more complex than conventional bonds, or both. – Reuters

Comment Guidelines

Has a comment offended you? Hover your mouse over the comment and wait until a small triangle appears on the right-hand side. Click triangle () and select "Flag as inappropriate". Our moderators will take action if need be.

Verified email addresses: All users on Independent Media news sites are now required to have a verified email address before being allowed to comment on articles. You are only required to verify your email address once to have full access to commenting on articles. For more information please read our comment guidelines